Zamansky LLC (”Zamansky”) warns investors holding High Yield Municipal Bond Mutual Funds (”High Yield Munibond Funds”) to beware of potential securities fraud violations. During 2009, High Yield Munibond Funds were in high demand by investors who sought to escape the volatility of the stock market, while earning increased yields. However, from mid-November 2010, according to Thompson Reuters, there have been approximately $24.7 billion in net outflows from these funds by investors. These cash outflows have forced investment managers to sell off the higher quality assets in their portfolios, leaving High Yield Munibond Funds with a higher portion of the lower quality, junk bonds.
Often, the nonrated or junk bonds held by the High Yield Munibond Funds are thinly traded and relatively illiquid munibonds. The junk munibonds may be finance housing or infrastructure projects that were hurt in the housing market crash. Investors may not realize that these junk bonds are “fair valued” by High Yield Munibond Funds at prices which are artificially or fraudulently inflated and do reflect the true state of the bond’s impairment or distress.
For example, the Invesco High Income Municipal Bond Fund (AHMCX) holds approximately 64% of nonrated bonds, while the Invesco Van Kampen High Yield Municipal Bond Fund (ACTHX) holds approximately 61% of nonrated positions, Nuveen’s High Yield Municipal Bond Fund (NHMAX) has 46% and Waddell &Reed’s Municipal High Income Fund has (UMUHX) has 44%.
As investors continue to exit High Yield Munibond Funds due to concerns over state and municipal budget deficits, these funds will be forced to sell or mark more and more of these assets to their true values, resulting in losses to investors. Belated write-downs of these bonds by a fund is often a sign that deliberate mispricing occurred in the past.
If you are an investor in a High Yield Munibond Fund who has suffered a loss, or if you are an investor who notices any apparent overpricing of nonrated or junk bonds held by your fund or sudden write-downs of assets, you may be the victim of fraud. You may wish to contact us to discuss your rights at (212) 742-1414 or email at firstname.lastname@example.org.